For most, April is tax season. However, as an entrepreneur or real estate investor, you are expected to make estimated tax payments throughout the year. While you may have the privilege of uncapped income, taxes tend to be more complicated.
Proactive tax management is a necessary first step to make the most of your irregular income. Here are 5 steps you can take to manage and reduce taxes as an entrepreneur or real estate investor.
1. Know When Estimated Tax Payments Are Due
Self-employed individuals, entrepreneurs, and real estate investors are responsible for paying taxes directly to the IRS in the form of quarterly estimated payments. Being your own boss means you have to calculate and remit payment for what you owe; it’s not automatically deducted from your paycheck like it is for W-2 employees.
This is great in that you don’t have to pay taxes right away, but it can quickly become an administrative and financial burden if you don’t stay on top of it.
To better manage your tax payments, you must first understand when they are due. This table highlights the typical due dates for quarterly estimated tax payments: (1)
Taxes are due on… | …for money earned… |
April 15 | January 1 – March 31 |
June 15 | April 1 – May 31 |
September 15 | June 1 – August 31 |
January 15 of the following year | September 1 – December 31 |
Failure to pay your estimated taxes or late payment may result in hefty penalties and fees charged by the IRS, so it’s critical to stay on top of these dates.
2. Know How Much You Should Pay
Understanding how much you should pay in taxes can be especially difficult if your income fluctuates each year. If you overpay, you run the risk of giving the IRS an interest-free loan, and if you underpay, you run the risk of being penalized. In this case, the safest thing to do is to avoid the underpayment penalty by paying the lesser of: (2)
- 90% of your current year tax liability or
- 100% of your prior year tax liability (if your adjusted gross income for the prior year was more than $150,000, then you must pay 110% of your prior tax liability)
Keep in mind that the IRS also provides a stipulation if you receive uneven income throughout the year. You may be able to reduce or avoid penalties by annualizing your income and making unequal payments throughout the year. (3)
3. Have a Tax Plan
After you determine how much tax you should pay, the next step is to create a tax plan to ensure you save the appropriate amount. The general rule of thumb is for self-employed individuals set aside 25-30% of their income for taxes, (4) but the exact amount you need to set aside depends on your business structure, tax bracket, state of residency, and more.
For individuals with irregular income, it’s important to adjust your savings as your income fluctuates. If you have a particularly successful month, consider putting 50-60% away to make up for months where your income is lower. Working with a wealth manager or utilizing a bookkeeping system are great ways to stay on top of your tax payments so you don’t find yourself facing a penalty come tax season.
4. Keep Tabs on Your Deductions
It’s easy to forget about all the expenses you paid for when you’re focused on managing your irregular income. But it’s important to document as much as you can in order to take advantage of every deduction. This may help you reduce your tax liability, ultimately reducing your estimated tax payments and putting less strain on your uneven cash flow.
There are dozens of expenses you can deduct as an entrepreneur or real estate broker. (5) Here are a few of the most common deductions:
- Startup costs
- Advertising
- Online services and subscriptions
- Travel expenses
- Continuing education
- Software, hardware, and other equipment
- Health insurance premiums and medical care expenses
- Home office and supplies
- Retirement contributions
5. Work With a Professional
Are you feeling overwhelmed or confused as you sort through important tax planning issues? With the right professionals by your side, managing your tax payments doesn’t have to be stressful.
At Grace Wealth Management Group, we offer a wide range of financial products and services to individuals and business owners. Along with investment management and alternative investments many other firms don’t have available for their clients, we also offer financial planning, insurance, corporate retirement plans, group insurance, and business planning. To learn more, schedule an appointment here or call me at (949) 631-3840 x2 or email jbang@cfiemail.com.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) professional, meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visit www.financialadvisorirvine.com.
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(1) https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
(2) https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/
(3) https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
(5) https://money.usnews.com/money/personal-finance/taxes/articles/self-employment-tax-deductions